Gunboat Diplomacy
Political Bias, Trade Policy, and War
Brendan Cooley
19 January 2019
The Modern Economic Peace, 1870-2014 (Coe)
Why?
Dominant Paradigm: Trade mediates preexisting conflicts of interest
- Governments value trade, conflict disrupts trade
- \(\implies\) Commercial peace hypothesis
- Conflicts of interest: territorial, ideological, etc
Commercial Policy Objectives
- Governments weakly mercantilistic, desiring
- Some degree of trade protection at home
- Trade liberalization or market access abroad
Market Access Externalities
- Protectionist barriers shift profits from foreign to home firms
- Thus, trade policy itself generates conflicts of interest between mercantilist governments
Perry Expedition: Governments willing to threaten war to open foreign markets
Political Bias (Jackson and Morelli 2007)
Local definition: Degree to which government internalizes narrow (protectionist) interests of firms at the expense of broad (liberal) interests of consumers
- Grossman and Helpman (1994), Bueno de Mesquita et al (2004)
Regimes and Political Bias
- Democracies afford consumers (voters) access to policymaking process, more liberal trade policy preferences than autocracies (Mayer 1984, Grossman and Helpman 1996, Milner and Kubota 2005)
Argument in Brief: For democracies, liberal preferences \(\implies\) smaller market access externalities \(\implies\) smaller conflicts of interest \(\implies\) fewer wars
- Additionally, liberal preferences \(\implies\) more trade
- Spurious correlation between trade and peace
Model Structure
Bargaining Environment
- Two governments bargain over trade policies, \(\widetilde{\boldsymbol{\tau}} = \left\{ \tau_i, \tau_j \right\}\)
- “Home” gov \(i\) makes TIOLI offer to “foreign” gov \(j\)
- Information about \(j\)’s costs of war held privately
\[ \widetilde{\boldsymbol{\tau}}^\star(a_i) = \text{argmax } \widetilde{G}_i \left( \widetilde{\boldsymbol{\tau}}(a_i), \omega^\star(\widetilde{\boldsymbol{\tau}}(a_i) | a_j) | a_i \right) \]
- Foreign can accept or declare war
\[ \omega : \widetilde{\boldsymbol{\tau}}(a_i) \rightarrow \left\{ \text{war}, \neg \text{war} \right\} \]
International Economy
- Representative consumer and \(n\) firms in each economy, monopolistic competition
- Krugman 1980, Venables 1987, Ossa 2012
Government Preferences I
\[\begin{equation} \label{eq:G} G_i(\tau_i, \tau_j | a_i) = a_i V_i^x(\tau_i) + \Pi_i(\tau_i, \tau_j) + r_i(\tau_i) \end{equation}\]
- \(V_i^x(\tau_i)\) - consumer welfare
- decreasing in \(\tau_i\)
- \(\Pi_i(\tau_i, \tau_j)\) - firm profits
- increasing in \(\tau_i\), decreasing in \(\tau_j\)
- \(r_i(\tau_i)\) - tariff revenue
- non-monotonic in \(\tau_i\)
\(a_i\) is measure of government’s sensitivity to interests of consumers
Government Preferences II
Non-cooperative Equilibrium
Non-cooperative Equilibrium
Regime Change and Conflicts of Interest
Optimal Puppet Regimes
- When a government wins a war, it earns the right to replace the vanquished government with a “puppet” that prefers lower barriers to trade
\[ \max_{a \in (0, \overline{a}]} G_i( \tau_i^\star(a_i), \tau_j^\star(a) | a_i ) \]
- Losing governments have puppet’s policies imposed on them
Conflicts of Interest
- Utility difference between (costlessly) winning a war for regime change and being replaced by a puppet
\[\begin{equation} \label{eq:Gamma} \Gamma_i(a_i, a_j) = \overline{G}_i(a_i) - \underline{G}_i(a_i, a_j) \end{equation}\]
Bargaining Environment
Results
Proposition 3: Conflicts of interest smaller for low bias (democratic) governments.
Proposition 4: The probability of war is lower for low bias (democratic) governments.
Proposition 5: Equilibrium trade flows are higher for low bias (democratic) governments.
The Modern Economic Peace
Conclusion
Trade Policy in the Shadow of Power
- Equilibrium trade policies balance
- Domestic political interests
- Foreign military constraints
- Threat of regime change sufficient to produce changes in policies
- Exists no simple mapping between domestic preferences and trade policy outcomes (Gawande et al 2009)
- IR parlance: “second image” and “second image reversed”
Conflicts of Interest versus Bargaining Failures
- Fearon 1995: given a conflict of interest, what prevents peaceful settlement?
- Moravcsik 1997: what do governments want? and why do their objectives bring them into conflict with one another?
Thank You
Title Slide Image Credit: Charles Severin (American lithographer, born between 1808-1820; died ca. 1860). 1853 (creation). The American Expedition, Under Commodore Perry, Landing in Japan, July 14, 1853, Overall view. visual works; prints (visual works); planographic prints; lithographs. https://library.artstor.org/asset/SS35100_35100_35234600
Bargaining
- \(c_i\) - home government’s costs of war
\(c_j \sim F\) - home’s belief about foreign’s costs of war
- \(F\) uniform on \([0, \overline{c}]\)
\(\rho\) - probability home government wins war
Successful Regime Change
\[\begin{equation} \label{eq:Gbar} \overline{G}_i(a_i) = G_i(\tau_i^\star(a_i), \tau_j^\star(a^\star) | a_i ) = G_i(\tau_i^\star(a_i), 1 | a_i) \end{equation}\]
Foreign Imposition of Regime Change
\[\begin{equation} \label{eq:Gubar} \underline{G}_i(a_i, a_j) = G_i(\tau_i^\star(a^\star), \tau_j^\star(a_j) | a_i) = G_i(1, \tau_j^\star(a_j) | a_i) \end{equation}\]
Foreign Government’s Expected Utility for War
\[ \widehat{G}_j(a_j, a_i) = (1 - \rho) \overline{G}_j(a_j) + \rho \underline{G}_j(a_j, a_i) - c_j \]
International Economy I
Consumers
\[\begin{equation} \label{eq:cMax} \begin{split} \max_{X_i, Y_i} & \quad X_i^\alpha Y_i^{1 - \alpha} \\ \text{subject to} & \quad P_i X_i + Y_i \leq w_i L \end{split} \end{equation}\]
- \(X_i\) CES aggregate of differentiated manufactured goods
Firms
- \(n\) firms producing manufactured goods in each economy
\[\begin{equation} \label{eq:Pi} \begin{split} \max_{p_i} & \quad \Pi_i(p_i) = \left( p_i - w_i \right) \left( x_{ii}^\star(p_i) + x_{ji}^\star(p_i) \right) \\ \text{subject to} & \quad x_{ii}^\star(p_i) = p_i^{-\sigma} P_i^{\sigma - 1} \alpha w_i L \\ & \quad x_{ji}^\star(p_i) = (\tau_j p_i)^{-\sigma} P_j^{\sigma - 1} \alpha w_j L \end{split} \end{equation}\]
International Economy II
Economic equilibrium is pair of wages \(\left\{ w_i, w_j \right\}\) such that international goods market and local factor markets clear
Assumptions
Assumption 1: (costs of war are bounded) \(c_i < \kappa\) where \(\kappa\) is a postive constant defined in the Appendix.
Assumption 2: (agricultural sector sufficiently large)\[ \alpha < \frac{2}{3} \frac{\sigma}{\sigma - 1} \]
Assumption 3: (governments are weak mercantilists) \(a_i \in (0, \overline{a})\) with
\[ \overline{a} = (2n)^{\frac{1}{1-\sigma}} \left( \frac{\sigma}{\sigma - 1} + \frac{1}{2} \right) \]
Non-cooperative Equilibrium
Definition 3: A noncooperative equilibrium is a pair of policies \(\left\{ \tau_i^\star(a_i), \tau_j^\star(a_j) \right\}\) such that
\[ \tau_i^\star(a_i) = \text{argmax } G_i(\tau_i | \tau_j^\star(a_j), a_i) \]
and
\[ \tau_j^\star(a_j) = \text{argmax } G_j(\tau_j | \tau_i^\star(a_i), a_j) \]
Lemma 3: \(\tau_i^\star(a_i)\) is decreasing in \(a_i \in (0, \overline{a})\) with \(\tau_i^\star(\overline{a}) = 1\).